Do Bundled Payments Make the Grade?

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The bundled payment challenge

Traditionally, third-party payors reimbursed healthcare providers for services performed on a fee-for-service basis. The Patient Protection Affordable Care Act has been exploring alternative payment models that result in improved quality of care and lower costs.

One initiative comes in the form of bundled payments, also known as episode-based payments, which are becoming more common as organizations experiment with alternative ways to structure reimbursement. CMS recently invited providers to help test and develop four different models of bundling payments.

In a bundled payment methodology, a single, "bundled," payment covers services delivered by two or more providers during a single episode of care or over a defined period of time. For example, if a patient has cardiac bypass surgery, rather than making one payment to the hospital, a second payment to the surgeon and a third payment to the anesthesiologist, the payor would combine these payments for the specific episode of care (i.e., cardiac bypass surgery).

Analysis of Medicare claims data suggests that if this practice were adopted widely, this alternative method of reimbursement would have the potential to improve quality of care, decrease costs and increase provider margins.[1] Preliminary bundled payment studies show initial savings on cost, including reducing the average length of stay by a half day, lowering the cost per bundle by $600 and decreasing re-admissions by 40 percent.[2] Many hospitals and healthcare systems are considering bundled services, especially for high-volume/high-cost episodes of care because of the potential to standardize procedures and decrease expenses. Many physicians already have experience with bundled payments governing an episode of physician services, such as global payments for obstetrical care. The bundles in our discussion here include a wider range of services.

Financial models provide direction

Every provider needs to discern whether bundled payments will fit their strategy, in conjunction with other reimbursement models, such as accountable care organizations, to deliver the highest quality care in the most efficient manner. To support these decisions, it is important for organizations to develop a financial model that can simulate the outcome of changes to a series of bundled payment drivers and depict the impact and implications of varying reimbursement approaches.

Bundled payments offer a significant opportunity. At the same time, there are myriad considerations and unknowns: financial, operational, contractual and clinical. As a tool to anticipate the nexus of theory and practice, financial simulation provides the up-front thinking to test the waters.

In the absence of a crystal ball, how would a provider know whether or when to consider the bundled approach? Rather than the best guesstimate or a jump into a new reimbursement model, financial simulation gives detailed data to inform your course of action.

Why does financial modeling add value?

Although many healthcare organizations are already exploring bundled payment structures, a granular financial analysis offers the best mitigation of risk and a safeguard against unintended consequences. Specifically, going through the actions of building a financial model requires that you think through all of the resources and expenses involved in bundling services. For example, do you have sufficient systems and processes in place to capture quality data and provide timely financial analysis? This includes reconciling budgets at the conclusion of an episode to determine whether all of the patient claims were associated with the bundle, to make any performance adjustments and to administer any risk arrangement. The reconciliation process for many providers and payors is a manual process and can require up to a few dedicated staff to complete the task. On the clinical side, do you have the right number and skillset of clinical staff, such as nurse navigators, to truly case manage these patients? Without forecasting and fine-tuning the allocation of specific resources, organizations may end up losing money on these episodes of care.

What is different about financial simulation?

To manage the uncertainty of this emerging payment method, proper financial analysis must explore an entire range of possible outcomes for the most sensitive business drivers. 

A critical component of financial simulation for bundled payments is robust scenario testing. A bundled payment financial simulation needs to be able to work through intricate, hypothetical questions, taking into account volume, utilization, quality, cost and reimbursement assumptions to quickly demonstrate probabilities for financial and operational impact.

The following are likely the most sensitive business drivers to consider in bundled payment financial simulation:

  • Patient attribution. There needs to be a clear process to support early identification of patients who fall into the bundle, so that case management support can be provided to these patients from the onset to manage their care. This process will also facilitate the early collection of relevant patient data that can be tracked throughout the duration of the episode.
  • Service definition. It is crucial to define exactly what services are included within a bundle, and what is excluded. Sometimes patients clearly fall into an episode of care, but patients with co-morbid medical conditions who require significant healthcare services beyond the bundled condition or procedure (e.g., HIV) are typically excluded. In addition, bundles can exclude certain patients by placing restrictions on the age of included patients. Determining which services will be automatically paid under a bundled payment can be challenging, and clinicians should drive this decision.
  • Volume and utilization scenarios. Financial modeling not only requires a strong understanding of an organization's historic and current volume and utilization trends for the bundle, but this process must also incorporate industry practices and evidence-based medicine. It is fairly straightforward to estimate future key drivers based on past performance; it is more difficult to incorporate changing care delivery models and utilization patterns to accurately predict future patient volumes and utilization levels for a specific bundle. Additional factors to consider in this analysis include changing market dynamics, internal growth strategies and physician practice patterns.
  • Infrastructure expense required to support program management. Be sure to not underestimate the clinical, technology and operational resources necessary to launch and sustain a new program of this nature. Designing and building an infrastructure to launch this program requires participation from all facets of an organization, from the executive level through finance and business office departments to quality, nursing and medical staff services. Many organizations do not fully assess necessary resource requirements and costs, and fall short in such areas as information systems, where they lack the capabilities to collect detailed cost information at the patient and service-line level.
  • Payment strategies. Based on your organizations risk tolerance and quality performance, alternative payment models should be explored and modeled to determine the most financially feasible arrangement. The most common payment strategy is a shared savings model that offers an incentive for the provider to reduce healthcare spending to be below the negotiated bundled payment rate by allowing the provider to share in any of the savings realized. Under this model, the provider bears no responsibility for costs that occur above and beyond the bundle price. Many organizations test the waters by first entering shared savings models where they are protected against downside risk, with the intent to move toward full-risk bundled payments as they become better at managing patient care. Under a full risk model, the provider is responsible for all of the costs above the negotiated rate, but can also retain all of the savings realized as a result of their efforts.
  • Quality metrics. Finally, it is critical to define and track quality metrics under a bundled payment model so that there is no degradation in the level of quality because of the introduction of potential financial savings. It will be challenging to define what the quality metrics should be and on what levels, but there needs to be alignment between hospitals and physicians on these measures in order to accurately track outcomes and understand the financial impact of a  shared savings model.

The bottom line
For healthcare organizations considering bundled payments, going through financial simulation modeling is a must. As the government launches healthcare reform, the industry is facing complex changes. A financial simulation model is a smart organization's best way to predict the economics involved and with reason, consider a course of action. Amid so much potential for unexpected domino effects, it's a worthy investment.

Karen Curtis is a leader in Point B's Healthcare Practice and has over two decades experience leading complex, strategic business initiatives for hospitals/health systems and physician organizations. Her work has extended across the planning and creation of new programs and services, operational improvements and implementation of new clinical information systems and processes. Curtis holds a MBA and MHA from the University of Washington and a BS from the University of Notre Dame.  

[1] The Healthcare Intelligence Network, “Case Study in Bundled Payments: The Baptist Health System Experience” September, 2011.
[2] “Bundled Payment Across the U.S. Today: Status of Implementations and Operational Findings”, Michael W. Painter JD, MD., Senior Program Officer, Robert Wood Johnson Foundation, June 2012.

More Articles on Bundled Payments:

5 Tips for Taking on Risk in New Payment Models
3 Financial Challenges of Bundled Pricing
Global Payments Improve Quality, Reduce Spending

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